ORIENTAL YUHONG WATERPROOF(002271)：1Q22 RESULTS SOLID;MULTIPLE MEASURES LIKELY TO EASE GROSS MARGIN PRESSURE

　　1Q22 results in line with our forecast
　　Oriental Yuhong Waterproof (Yuhong) announced its 1Q22 results: Revenue and attributable net profit rose 17% and 7.1% YoY to Rmb6.31bn and Rmb317mn, in line with our expectations.
　　High revenue growth sustained. Yuhong’s revenue in 1Q22 grew 17% YoY to Rmb6.31bn despite tight funding in the real estate sector and tumbling new GFA starts, which we think clearly demonstrates the firm’s counter-cyclical business. Blended gross margin down on raw material cost increase. In 1Q22, gross margin (including taxes and surcharges shrank 4.6ppt YoY or 2ppt QoQ to 28.3% due to raw material cost increase. Expense ratios stable YoY. In 1Q22, overall expense ratio edged down 0.8ppt YoY to 19.1%, with financial expense ratio falling 0.7ppt, while credit impairment dropped around Rmb120mn YoY. As a result, net margin only decreased 0.5ppt YoY. Excluding equity incentive expense (up Rmb41mn YoY to around Rmb63mn in 1Q22), attributable net profit rose 21% YoY. Cash receipts to revenue ratio high; net cash outflow caused by increased payments. In 1Q22, cash receipts to revenue ratio remained flat YoY at 109%, but operating cash outflow reached Rmb4.78bn, due to increased inventory (up Rmb1bn QoQ) and other receivables (up Rmb2.64bn QoQ, mostly cash deposits), and declining payables (down Rmb1.3bn QoQ). Debt-to-asset ratio low. Yuhong now has around Rmb7.1bn cash on hand (net cash of nearly Rmb1.3bn), and its debt-to-asset ratio by end-1Q22 fell 4.3ppt QoQ to 42%.
　　Trends to watch
　　Bargaining power solid; downward pressure on gross margin likely to be limited. As the Russia-Ukraine conflict has led to surging crude oil prices, the pitch ASP since start of 2Q22 has rallied 9% QoQ to Rmb3,900/t. However, Yuhong partially eased the cost pressure by increasing pitch sales from abroad and developing its own production capacity for raw materials including thin film and nonwovens. Moreover, the firm raised prices for major products in mid-March, and adjusted its distribution channels. We therefore expect limited pressure on gross margin.
　　Strong demand from civil construction and non-housing projects; visible high-growth in 2022 driven by infrastructure construction. The credit risks in the real estate market and continued decline of new GFA starts has weighed on demand for waterproof materials since 1Q22. Nevertheless, Yuhong as a leading producer has expanded into supplies for non-housing projects and retail consumers. We think the firm is well positioned to benefit from accelerated infrastructure construction.
　　Financials and valuation
　　We leave our 2022 and 2023 EPS forecasts unchanged at Rmb2.13 and Rmb2.70. The stock is trading at 21x 2022e and 17x 2023e P/E. We maintain OUTPERFORM and TP of Rmb62.5, implying 29.3x 2022e and 23.1x 2023e P/E, offering 37% upside.
　　Risks
　　Raw material cost increase and credit risks in real estate market worse than expected; non-housing business expansion disappoints.
【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。

   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。